This may seem like a silly question, but I'm currently working on an LBO model that also includes various valuation methods, such as a DCF using levered cash flows. My question is, how long should my forecast period be for the DCF? Would it be incorrect to explicitly forecast 10 years of cash flows, if say the sponsor plans to exit its investment in 5 years? Thanks in advance!
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It wouldn't be "incorrect" but would likely be overkill unless the senior member you are working with needs more visibility (maybe its a high growth company that won't reach steady state for a while). It can also be helpful to understand what it will look post year 5 because those years will decide the exit multiple which will be a major driver of returns
Thanks for your response! So to clarify, it would generally suffice to project cash flows up until the sponsor's exit? Is this the standard industry practice in your experience? Especially since high-growth companies are typically not the targets of LBOs
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